Why America’s small businesses are becoming like banks

By Terra Terwilliger
November 15, 2010

By Terra Terwilliger
The opinions expressed are the author’s own.

Over two years after the start of the Great Credit Crisis, banks are still not lending money. But big businesses know exactly where to go for a quick, interest-free loan … the little guy. Even as corporate profits recover, big companies continue to squeeze their small vendors, stretching out payment terms and writing late checks. Unfortunately, this blatant exploitation is damaging the small business economic engine that drives half of US GDP.

A friend who owns a small consulting company recently received notice from a Fortune 500 client that henceforth their payment terms would be extended from 90 to 120 days. No discussion, no recourse, just a fancy legalese version of “we’re going to start paying you later because it’s better for us, so get used to it.”

That’s as if your employer casually one day sent you a letter saying that they were going to start paying you 30 days late. Unfortunately, you wouldn’t be able to tell your landlord, the gas company and the supermarket the same thing. Your bills still have to be paid on time.

My friend is not alone. Last August, The Wall Street Journal published an article titled “Big Firms are Quick to Collect, Slow to Pay,” which revealed how companies with more than $5b in annual sales were systematically slowing payments to suppliers, while speeding up their own collections. The analysis showed that companies with revenues over $5 billion took an average of 55.8 days to pay suppliers, compared to 53.2 days a year earlier … and compared to the 40.1 days in which businesses with revenues under $500 million pay up.

The situation is not getting better. “We just updated our payables analysis for 2010,” says a spokesperson for REL Consultancy, the company that did the original WSJ research. “We see the same trends in 2010. Large companies continue to pay slowly, and they are still using their muscle to make their suppliers accept longer payment terms.”

Big companies not only force vendors to accept painful terms, they also don’t reliably pay up. According to the Experian Business Benchmark Report of July 2010, the average days beyond terms (days a company is late on paying according to its own billing standards) for companies with over 1,000 employees increased by 5.6% over the past six months, with 17% of all monies owed delinquent. Some of these delays are doubtless due to billing errors or legitimate disputes about payment. Some are bids to wring a few more days of cash flow out of already stretched vendors.

In an October 2010 survey from Discover Small Business Watch, 46% of small businesses reported that cash flow is a problem. In a similar American Express OPEN Small Business Watch survey released October 13, 53% of small business owners reported cash flow problems. Some observers have positioned these numbers as a comeback, saying things have improved since 2009. True, but comparing 2010 favorably to 2009 is like saying Hurricane Rita was a comeback for New Orleans because it was better than Katrina. Less bad is not the same as good, especially considering the human cost.

These numbers mean that half of the small businesspeople you see every day are having trouble paying their bills. Think about the small business owners you know — the guy who runs your local coffee shop, or the designer who helps with your company website. Chances are 50/50 that they’re worried about having enough cash to keep their business running.

My friend’s company, the one that is now getting paid at 120 days, has maybe 20 employees and a few million dollars of annual revenue. Every month, she pays workers, rents office space, and keeps the lights on. If she has to wait four months to get paid, she can’t hire staff, order computers, or otherwise invest in her business. Instead, she must hoard her cash to make payroll and hope that the check actually comes on time.

Policy responses to the small business cash flow problem have focused on increasing bank lending. No one is talking about big businesses’ responsibility. Small businesses across the US complain vociferously about payment problems, but only to each other. We don’t speak up because we don’t think we have any options. And we’re right. Big companies bully small vendors because they can. Small companies put up with arbitrary term changes and late payment because the alternative is no business at all. And no one can afford to turn down work in this economy.

Big businesses are letting cynical number-crunching get the best of common decency … and their own long-term interests. Small businesses are like elephants. We remember. When talented vendors someday decline work, or demand a higher rate, or payment up front, big companies may regret their shortsighted behavior.

My challenge to the Fortune 500 is simple. Pay your small vendors — say, all companies with under $25 million in annual revenue — within 30 days. You will win loyal partners for the future. And by injecting much-needed cash into small businesses, you will also be making a real contribution to turning the US economy around.

Terra Terwilliger is the founder and principal of Brigid Executive Consulting, which helps companies make new technologies work for their business.

9 comments

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This is not a huge surprise in terms of the relationship between economic growth / contraction and the velocity of money.

This produces the effect of less money apparent in the system, and this is a real economy effect so it has the possibility to feed upon itself.

Another factor is that this is one of the hidden locations of inflation. It remains here as an unrealised cost to the end user, waiting until it can wait no more.

Posted by tonydd | Report as abusive

As a small business owner running a $2M+ a year business creating 20 jobs in NC, this hits very close to home. Small businesses can appear very healthy on a P&L and still fight to make payroll because of delinquent payments. We service several Fortune 1000 companies and provide national services at our expense. We have agreements with Net 30 day terms for payment and still have to make collections calls into accounts that are 30-60-90 days past those terms. There’s really nothing we can do. If we threaten to stop work or prepare finance charges, we risk losing all the business altogether. There’s even the realized risk of being sued by Goliath for not completing a project, even if they haven’t made progress payments in 6 months. They know that expense is very damaging to a small business and use it to their advantage. It’s sad really.

Posted by techbizceo | Report as abusive

What do you expect in a country where the US Chamber of Commerce, contrary to its name, represents only the largest corporations?

What do you expect from a Congress that represents mainly large, multinational corporations like Microsoft? Members of Congress often say that they are proponents of small business, but they are lying; small businesses do not donate anywhere near as much to election campaigns as do large, multinational corporations.

Posted by saucymugwump | Report as abusive

We’ve seen this big time at Livio Radio with slow payments and it sucks!

I get it, why would they pay me when they don’t have to and know we’re not going to go after them. When supply is higher than demand, it makes it a lot easier to take advantage of the situation.

However breaking contract is still wrong.

Posted by JakeSigal | Report as abusive

U.S.A. – the land of opportunities.

Yes, only if you are big enough.

Posted by doctorjay317 | Report as abusive

This is pretty much the same as an old saying I am quite fond of…. “If you owe the bank $100,000, that’s your problem. If you owe the bank $100,000,000, that’s their problem.”

Posted by thatsawinner | Report as abusive

Love the end. We are elephants and BIG BUSINESS will eventually end of regretting their 90 and 120 day payment terms simply because the best talent will refuse to work for them. Or, the elephants will all die with vultures picking our bones. Hopefully, it won’t be the latter.

Posted by Thatcher | Report as abusive

Our own and many client company experiences over the past 18 months validate this article’s point about significant unilateral extended payment practices by larger companies, universities and government agencies.

Talk about a failure to support emerging, small and medium size enterprises and putting a squeeze on small business cash flow – this has truly had a severe direct negative impact on local economies. This surely is not the desired American way.

Moreover, we see companies trying to drastically cut vendor’s prices and hear of employers overworking their people.

Unfortunately these negative factors along with customers’ delaying or cancelling work projects are a negative ‘multiplier’ that combine to delay recovery prospects by perhaps years.

More, Adam Smith’s notion of pursuing ‘self interest’ as a positive characteristic of western capitalism is not applicable within the context of such declining, broken economic model – in fact, self interest in this business environment damages the common good.

Now more than ever #B2B #networks will have to #reinvent and #collaborate for shared #business #success!

Posted by businessdoctor | Report as abusive

[...] associated practices are not necessarily sexy and it can definitely be overdone (many companies got extremely harsh with their suppliers and customers during the downturn). But why would we stop doing the good [...]

As a small business owner I live with unbelievable a/r ‘delays’ from Fortune 500 companies every day! I am appalled at the lack of honorable and ethical business practices. We are dealing with corporations that owe our small family business in excess of $50k for over 120 days-this past month I have heard everything from our computers are down, our check office was destroyed in Hurricane Sandy (funny, the checks seem to becoming from Quebec), we are going from public to private (yet you were able to borrow nearly $400 million), we lost your invoice (funny, that was used at the 60 day mark)…. Meanwhile, I can’t go ANYWHERE for money – my vendors won’t deliver if I am one day over due, my bank won’t cash checks if I am a penny short, and Uncle Sam requires me to remit payroll taxes every single week….but, my Fortune 500 customers are now using a competitor of mine – oh, when they do pay – they will ask for discounts, or ask for adjustments to rush thru a payment! And deduct the “overnight mail” fee. I am especially frustrated this year cause this little business may just fall over cliff – neigh…..we may jump!
All I want for Christmas is for you big guys to pay your bills! Oh, and a rubber stamp that my father in law (now deceased) used to stamp across over due invoices
PLEASE PAY US
SO WE CAN PAY THEM
AND THEY WILL PAY YOU

Posted by CindyLee2262 | Report as abusive